The Fishery: The Objectives of Sole Ownership

The Fishery: The Objectives of Sole OwnershipAuthor(s): Anthony ScottSource: Journal of Political Economy, Vol. 63, No. 2 (Apr., 1955), pp. 116-124Published by: The University of Chicago PressStable URL: http://www.jstor.org/stable/1827047 .

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THE FISHERY: THE OBJECTIVES OF SOLE OWNERSHIP'

ANTHONY SCOTT

University of British Columbia

The rights of property, as such, have not been venerated by those master minds who have built up economic science; but the authority of the science has been wrongly assumed by some who have pushed the claims of vested rights to extreme and antisocial uses. It may be well therefore to note that the tendency of careful economic study is to base the rights of private property not on any abstract principle, but on the observation that in the past they have been inseparable from economic progress..... ALFRED MARSHALL, Principles of Economics (8th ed.), p. 48.

IT IS a commonplace to observe that for natural resources-as for other types of wealth-"everybody's

property is nobody's property." No one will take the trouble to husband and maintain a resource unless he has a reasonable certainty of receiving some portion of the product of his management; that is, unless he has some property right in the yield. Yet the mere existence of the institution of private property is not sufficient to insure the efficient management of natural resources; the property must be allocated on a scale sufficient to insure that one management has complete control of the asset. In this paper, for example, I shall show that private property in fishing boats is not a sufficient condition for efficiency; sole ownership of the fishery is also necessary. Some as- sets, such as oil fields, fisheries, and watersheds, occur on an immense scale, and it is a very real problem to know whether the efficiency gained from uni- fied management provides a social gain

sufficient to offset the possible dangers of the creation of some immense sole- ownership organization (such as a co- operative, a government board, a private corporation, or an international authority).

This paper continues the discussion of the economics of private and common property undertaken in "The Eco- nomic Theory of a Common-Property Resource: The Fishery," by H. Scott Gordon, which appeared in the Journal of Political Economy for April, 1954 (pp. 124-42). Gordon's contribution was a most stimulating, original, and important study of the advantages of sole ownership, which seem practically to have escaped theoretical discussion since Marshall's time.' While the economics of the farm and the forest are continually under revision, the earlier economists' insistence3 that efficiency in production depends upon scarce wealth

1In writing this paper, I have had interesting and helpful discussions with Messrs. D. C. Corbett, Stuart Jamieson, W. J. Anderson, 0. R. Reischer, and E. E. Snyder.

2 See Marshall, Principles, pp. 166-67 and 369- 72; see also Gordon's article in the Canadian Journal of Economics and Political Science, Feb- ruary, 1952.

'See J. S. Mill, Principles (5th ed.; New York, 1897), Book II, chap. ii, sec. 5, and the citation to Sismondi's Etude sur l'economie politique (nrd.) in the footnote.

116



THE FISHERY: THE OBJECTIVES OF SOLE OWNERSHIP 117

being "appropriated" has been rele- gated to the introductory chapters of principles textbooks and is scarcely considered in them again. This is all the more reason for welcoming Gor- don's bringing some "political economy" back into economics.

In this paper I wish to compare the use of a fishery by competing fishermen with the mode of management that would be most profitable to a "sole owner" of the same fishery. In particular, I wish to show that long-run considerations of efficiency suggest that sole ownership is a much superior regime to competition but that in the short run in the ordinary case there is little difference between the efficiency of common and of private property.4

I do not wish to dispute in any way the facts about fisheries presented by Gordon (except those about opportunity costs) but to welcome them and to use them myself. Particularly interesting was the point made about the ignorance among fisheries biologists as to whether recent conservation meas- ures have ever produced changes in demersal (deep-water, sea-bottom) fish populations. It is remarkable that many popular books advocating the conservation of natural resources, after de- scribing the undoubted success of conservation in some pelagic (surface) and in-shore fisheries, then--perhaps unin- tentionally-give the reader to under- stand that the same conservation might be achieved by controlling demersal

fisheries, an assertion that is apparently as yet unverified.

I In many ways the central part of

Gordon's paper is Section IV, "The Bionomic Equilibrium of the Fishing Industry." In this section he sets out to suggest the nature of the equilibrium of this common-property industry as it occurs in the state of uncontrolled or unmanaged exploitation. Later, he un- dertakes to indicate the nature of a socially optimum manner of exploitation, which is presumably what govern- mental management policy seeks to achieve or promote.5 In a subsequent section of the present paper I shall discuss this optimum, but I should like first to recapitulate his exposition of the equilibrium of a given fishery under conditions of competitive exploitation by individual fishermen.

Gordon first argues that, because there is no sole owner to capture for himself whatever gain there may be from using the fishery conservatively, it will pay every fisherman to enter the industry so long as he can earn some- thing above his cash expenses plus his opportunity costs. As long as fishermen do this, the tendency will be for exploitation to continue beyond the point where the marginal product of fishing effort equals its marginal cost, to the point where the average product of effort just covers the marginal cost of effort (where, in fact, every fisherman just covers his opportunity costs, and average cost is equal to price). T here tends, it is argued, to be no "surplus" earned in the industry-the dollar value of the catch exactly equals

' "Sole ownership" is not monopoly but merely complete appropriation of all of a natural resource in a particular location. Putting a resource into sole ownership is sometimes called making a resource "specific" to one owner (see my forthcoming Nat roal Resources: The Eco- nomiics of Conser-vation [Toronto: University of Tor-onto Press]).

These two aims have been paraphrased from Gordon, op. cit., p. 136.



118 AN 'IIONY SCOTT

the dollar cost of landing the catch. Under such a regime, the argument

continues, the possible equilibrium of effort, fish population, and income may be described in terms of a system of four variables, which may be drawn in four figures. These diagrams can be conveniently studied in one four-quadrant diagram (Fig. 1).

If we start with the two upper quadrants, we see that output (or landings) L depends upon both the size of the input (or effort) E and the size of the capital stock, or population, P. The size

of the capital stock, or population, is in turn itself assumed to be dependent upon the effort. In the southeast quadrant is a cost function, C, showing con- stant marginal costs of effort, and in the southwest quadrant is a simple tran- sition function of 450 which confronts the cost of various kinds of effort with the revenue from various sizes of landing. The condition of equilibrium is that the total costs must equal the total

a Although Gordon admits that this is not al- ways the case, the analysis holds only when population is affected by effort.

POPULATION P

__-

P

__

5

LANDINGS L$-- / - ~ 0 e E EFFORT /> \

$ C

COST FIG. 1




revenues, 01. In diagrammatic terms there must be an inscribed rectangle in the four quadrants. Hence the dotted lines do not represent an equilibrium, but the solid lines do.

Assume that, in equilibrium, a certain total "effort," E (that is, of fishermen-plus-equipment), is being ex- pended in the fishery. This effort, ex- pended annually, is compatible with a certain size of fish population, shown on the P-axis, and there is an equilibrium annual catch that can be achieved by this effort with this population, shown on the L-axis. But, as was argued above, the fishery will not be in equilibrium unless the cost of expend- ing that effort (shown on the C-axis) is exactly equal to the revenue, L. XWhen L and C coincide, the fishery is in equilibrium.

A condition for achieving a positive, stable equilibrium is that there must be one and only one rectangle that will fit into the four quadrants. There niay be no unique equilibrium possible, given the three functions, unless one of them is curvilinear, or (as here) tin- less the E- and L-functions have different intercepts on the P-axis.7

It is also possible to show the suggested equilibrium position of a sole owner. The dotted lines may now be used to represent this equilibrium: the difference at 1' between the cost and the landings revenue is assumed to have been maximized. Gordon's description of the equilibrium applies to this diagram:

The optimum intensity of fishing effort is that which maximizes L - C. This is the

monopoly solution; but, since we are con- sidering only a single fishing ground, no price effects are introduced, and the social optimum coincides with maximum monopoly revenue. In this case we are maximizing the yield of a natural resource, not a privileged position, as in standard monopoly theory. The rent here is a social surplus yielded by the resource, not in any part due to artificial scar- city, as is monopoly profit or rent.

If the optimum fishing intensity is that which maximizes L - C, . . . the optimum fishing intensity is Oe' of fishing effort. This will yield 01' of landings, and the species population will be in continuous stable equilibrium at a level indicated by P5.8

II

Gordon calls these two situations '.positions of equilibrium." It is true that in the first, the competitive exploitation of the fishery, the equilibrium indicates values of C., P., and E that are compatible with one another, though we are not told just how the fisherman arrives at this equilibrium. It should be noted that it is quite possible that a competitive fishery in the process of production-which might be described diagrammatically as a trial-and-error procedure of searching for the inscribed rectangle--might easily miss an un- stable equilibrium and gravitate rapid- ly between the alternate extremes of zero output and zero population. Fur- thermore, in those fisheries there may be no stable equilibrium short of zero landings and full natural population. It is not unlikely that fished-out lakes -which are, after all, demersal fisheries in the economic sense of Gordon's paper-would be examples of this im- possibility of finding a competitive equilibrium position.

"Would be" because the fundamen- tal assumption in Gordon's paper (apart from the admittedly unknown

7 For those readers who would like to identify this diagram with the algebraic system given in Gordon's paper, we can say that P - a - bL; Pa _ bCE -- 1; C = qE; C _ L (Gordon, op. cit., pp. 141-42). 'Ibid., p. 141.



120 ANTHONY SCOTT

nature of the biological relationship between landings and demersal populations) is that there are in fishing no diminishing returns and hence no increasing costs and no incentive to stop operations short of the equality of total costs and landings. Surely this funda- mental assumption is incorrect; surely in the short run (with population and equipment fixed) each fishing boat will experience increasing costs as it at- tempts to increase its landings.

Gordon's analysis, which I have fol- lowed in Figure 1, relies upon the de- pletion of the population to produce a species of "diminishing returns" effect that will explain, with price given, why the competitive fishery does not expand indefinitely. But this explanation applies only to the long run and cannot hold within a single season, when the fish population is one of the fixed inputs. In the short run, fishermen do not expand their catch indefinitely because they do experience increasing costs in attempting to increase their landings. Gordon depends upon the omnibus variable "effort" to cover the change- able combinations of men, boats, and other equipment used by individual fishermen. But, if we look through this omnibus variable, we see that in fact the short-run situation in a fishery ex- ploited by competing fishermen will be very like the standard situation in pure competion. The supply curve of this fishery (with the price given by the world market situation) will be made up by the addition of the relevant por- tions of the supply curves of the individual fishermen. These curves will slope upward because, with fixed equipment and a fixed number of boats, there will be some number of landings per boat which has a least cost; if the

crew is worked long hours, or the boat is kept running without time for main- tenance or repair, the cost per landing will begin to rise. Each boat will increase its landings until its supply price (marginal cost) is equal to the going price. The "surplus" that might be captured in this situation is the usual quasi-rent, available to each boat by operating at the point where marginal costs are equal to marginal revenue.

Now (if we continue to consider only short-run decisions), would a sole owner select a different rate of output than that which was determined under competition? There are two possible situations here: (1) the sole owner may take over an existing competitive fishery, boats, canneries, and crews. (2) The sole owner may reorganize the fishery in the most efficient way; this is not the same short-run situation but an alternative situation.

1. If the sole owner were taking over for a season only a fishery that had been equipped in the manner suit- able for operation by competing fishermen, he would operate it in exactly the same way as they had, that is, at the output for which the marginal cost of fishing equaled the price of the product. There is, however, one qualification of this assertion. If it were the case that competing fishermen were so numerous that boats got in each other's way, then the sole owner would rationally lay off some of the boats (and perhaps canneries and collecting boats) for the season. In this way he could reduce the external diseconomies of fishing. But, apart from this qualification (which is really a matter of the long run), the sole owner and competitive fisherman would in the short run oper-




ate the fleet identically, so that marginal cost equaled price and so that the marginal product of labor equaled the price of labor.

2. However, if a sole owner expected to have permanent tenure, then even in the short run his organization of the fishery would probably be quite different from that of small competing fishermen. For instance, it has been suggested that on the West Coast the sole owner of a salmon fishery would rely more on traps than on vessels; doubt- less economically similar techniques are known in the demersal fisheries. Not only would a sole owner prevent the wasteful interference of competing fishermen with each other, but he would also design his fleet and his transport and packing facilities so as to take advantage of the economies of integration and scale. When he had worked this out, assuming that he was in competition with the owners of other fisheries, he would still tend to operate where short-run marginal cost equaled price. Whether this rule would result in his using more or less variable factors, and whether his catch would be larger or smaller, it is impossible to guess a priori. There is no reason to believe that it would be significantly different, although the productivity of all inputs would almost certainly be higher, since the sole owner has the choice of a wider range of techniques."'

Hence, we can say that, as a general rule, the mere fact of sole ownership does not bring about a significant

' Another external diseconomy arises from the shortage of really skilled labor. A sole owner could either plan to economize on the use of labor by adopting labor-saving techniques (which, to an extent, is a method also open to competing boats) or to act as a monopsonist in the purchase of local labor services, or both.

change in the exploitation of the fishery in the short run. Both the sole owner and the competing fisherman will operate at an output which is theoretically similar (in its equality of marginal cost and marginal revenue) to that in other industries. Only if there is an opportunity for adopting alternative fishing techniques that reduce the in- vestment necessary for a given output is there an argument in favor of sole ownership. Some efficient techniques may be profitable only on the assumption that a very large fishing operation can adopt them. But why cannot there be large-scale efficient operations under competition among fishermen? Perhaps because of the danger of diminishing the population or of the fear of its diminution; but these are long-run dangers which I shall discuss below.

While I am on the short-run part of the argument, it is relevant to com- ment on the subject of the cost of the variable factors. These can be divided into cash costs and opportunity costs of the fishermen. The smaller the opportunity costs-perhaps because of the immobility of the fishermen-the greater the use of factors in fishing, regardless of whether the industry is competitive or typified by sole ownership. The low opportunity costs do not provide a basic explanation of the in- efficiency of competitive exploitation of fisheries; it is the inability to control the size of the fish population in the long run which does that. Hence even in areas where relevant opportunity costs are high, as they are in the West Coast industry, we find more men and more rigs employed than would be employed in a "monopolized" fishery. The price system, when it works well, does not depend only upon high opportu-



122 ANTHONY SCOTT

nity costs to draw factors into the most productive employment. It also relies on employers dispensing with factors that are not needed; and our subject here is really the alleged failure of competitive fisheries to do this. Low opportunity costs are not relevant to the immediate problem. Where Gordon brings in the low opportunity costs

TOTAL REVENUE TC AND COST

TR

_x z -LANDINGS

TOTAL NET USER REVENUE -COST

W X' '

FIG. 2

of the industry, he drags in a red herring.10

III But it is when we come to the long

period that we see where the four- variable analysis fails as a description of the sole owner's optimum. What is now needed is an indication of the best use of the factors of production and of the fishery over time. It is not to be concluded, for example, that the ra-

tional owner would even wish to find an "equilibrium" size for the fish population. His most profitable action might be instead to deplete the fishery, grad- ually, over time; or, alternatively, to build it up over time. As long as the user of a fishery is sure that he will have property rights over the fishery for a series of periods in the future, he can plan the use of the fishery in such a way as to maximize the present value (future net returns discounted to the present) of his enterprise. From the social point of view it can be said that he will bring about the "best" use of the fishery and of all other factors invested in it over future periods by thus allocating outputs and outlays over time in accordance with the current rate of discount.

I can best illustrate the nature of this decision-making process by using the following diagrams (Fig. 2). The first diagram indicates the total costs and total revenues of a fishery in a period. The total revenue curve is shown as linear to indicate that the output (landings) of this one fishery has no effect on the price at which it may be sold. The total cost curve is shaped to suggest diminishing marginal returns (increasing costs) in the short run.

Under competitive fishing conditions, or if the fishery is taken into sole ownership, the tendency is to maximize net returns from the fishery by pro- ducing x, where TC is parallel to TR (that is, where marginal cost equals price) . This holds only in the short run.12 However, if the catch today has an influence on the population and so

"' Op. cit., p. 132.

"See my "Notes on User Cost," Economic Journal, June, 1953, p. 372.

'2 The output z is the compe-itive equilibrium (no-profit) output suggested by Gordon.



JIlL FISIIERY: THE OBJECTIVES OF SOLE OWNERSHIP 123

on the catch tomorrow, the sole owner will wish not only to maximize current returns but also to arrange for the optimum series of landings through the ensuing future periods. He will, in fact, wish to maximize the present value of his property. This he will do by inves- tigating the effect of his marginal current output on the present value (or sum of the discounted net returns of all future periods) and by fixing current output where marginal current net revenue is equal to marginal user cost. in such a position, since a unit of output is produced only if its addition to current net revenue exceeds its cost in diminished present value, the sole owner succeeds in keeping the future returns from the fishery as high as possible while maximizing current income. This position is to be found at w' where the total net revenue curve is parallel to the user-cost curve. The total net revenue curve is derived directly from the TC and TR curves and shows the difference between them. The user-cost curve shows the effect of succeeding units of current output on the "present value" of the enterprise. The greater the rate of interest (or the personal rate of time preference of the owner), the lower the valuation put on landings in the remote future, and the lower the user cost.

If increased output tends to diminish the population and so to reduce the net revenues that could be earned in other periods had output been restrained today, the user-cost curve will slope upward, marginal user cost will equal marginal net revenue at less than the maximum total net revenue, and sole ownership will result in a still greater reduction of desired output than would be the case if short-run considerations

only were at stake. This slope of the UC curve is presumed to describe the situation in those fisheries that are ex- haustible. Pelagic fisheries such as salmon and seal might be suggested.

If, on the other hand, increased output should tend to increase the population and the net revenues to be earned in future periods, the user-cost curve would slope downward. This, it has been said, is true up to a point of some fisheries: effort today not only pro- duces a catch today but also improves conditions for increase of the fishery. But this too may be truer of pelagic than of demersal fisheries. In these spe- cial circumstances the current rate of output of a sole owner would be some- what larger than that which yielded the maximum current return, and perhaps even more than that of Gordon's competing fishermen.

If landings have no effect on population (or, more precisely, on future landings), there is no user cost, no user-cost curve, and the output x is most profitable even when long-run effects are taken into consideration. This seems to be the thoroughgoing "demersal" case.

IV What has been left out of this pic-

ture of the sole owner's planning for the long run?

In the first place, following Gordon, I have not given much attention to the nature of the fixed equipment used in the industry. It may not be possible to replan the duration of the fishery (that is, the size of the population) from period to period with complete free- dom because the type of equipment needed to bring in small, unusually large, or postponed landings may not



124 ANTHONY SCOTT

be available. In actual practice it is necessary to plan the "scale" of a private fishery at the outset, to fit into the complementary provision of canneries, transport, etc. Once this "scale" has been established, it is not easy to change the general range of output per season if user cost changes. The problem here could be illustrated diagrammatically by showing a variety of short- run cost curves corresponding to the choice among "scales" of fishing industry. The net revenue curves so established would have to be confronted with a series of user-cost curves corresponding to alternative future long-run scales of the industry.'3

In the second place, I have assumed that the sole owner is not the monopolist of his product. If he were a monopolist and could influence the price by his output, he would be confronted by a nonlinear total revenue curve in Fig. 2, and it is conceivable that his landings per period would be even smaller than those of a corresponding solely owned fishery competing with many other fisheries. Also, if he were a monopolist, he would be able to influence the future price and even the trend of taste and demand for his output. There are so many possible conse- quences of this power that it is impossible to generalize about them. One

"Professor Donald Carlisle in his recent "The Economics of a Fund Resource: Mining," Amer- ican Economic Review, September, 1954, p. 609, has suggested a three-dimensional cost surface, with rate of mining on one axis, level (or scale) of the mine on another, and costs on the vertical axis. Instead of the usual U-shaped cost curve, a saucer-shaped surface is developed. It is not easy to see how the "present value optimum," which corresponds to our long-run equality of marginal user cost and marginal net revenue, is determined -its position is merely drawn into the diagram, apparently arbitrarily. However, the diagram is a useful reminder that scale and current output cannot be dissociated; each must be constantly re- appraised.

important possibility, however, is that the uncertainty surrounding the price and sales in each period would be some- what less than the uncertainty borne by competitive producers. Such mo- nopolists might well increase the in- vestment in the scale of the fishery. This, in turn, would tend to keep the fish population high and to promote a sustained yield rather than the gradu- ally decreasing yield that is a likely outcome of sole ownership.

Finally, I have asserted that the equilibrium of the sole owner who maximized the present value of the fishery would correspond more closely to the social optimum than would the competitive equilibrium. This is true only if the other enterprises in the economy are run by purely competitive busi- nessmen who attempt to maximize their profits and to maximize the present value of their enterprises in terms of the market rate of discount. If these assumptions are satisfied by equalizing marginal user cost and marginal net return, we have a situation where the marginal productivity of each factor is the same wherever it is used, and where the allocation of production over time corresponds to the rate of discount determined by the marginal rate of time preference of the community. In such circumstances, given the en- dowment of the economy with factors and resources, and given the tastes of savers and consumers, it would not be possible to increase the value of output of any product without reducing some other output by a greater amount. In this sense, the social optimum in both the long run and the short run would demand that common-property resources be allocated to maximizing owners, associations, co-operatives, or governments.



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The Fishery: The Objectives of Sole Ownership